US Dollar slightly up with markets looking for direction

  • The US Dollar eats into its gains on a further decline in Richmond Manufacturing numbers.
  • Traders try to keep powder dry towards main events on Thursday and Friday. 
  • The US Dollar Index sees pressure building on 103 to break lower. 

The US Dollar (USD) sees its gains in the runup to the Richmond Manufacturing numbers being partially erased with yet another miss on estimates. Markets meanwhile are having difficulties with the Bank of Japan (BoJ) rate decision this Tuesday. BoJ governor Kazuo Ueda has tested markets’ patience by not hiking, and postponing the long awaited exit out of negative rates. Markets are starting to recover near the US opening bell after the initial reaction was rather negative in reaction to the nerve game the BoJ is playing, with US yields jumping higher and equities flat to mildly negative. 

On the economic front, the miss on estimates in the Richmond Manufacturing Index is eating into the earlier gains the US Dollar booked in the run up towards the number. All eyes will now be towards Thursday and Friday with the US Gross Domestic Product on Thursday and the Personal Consumption Expenditures on Friday. On the other side of the Atlantic, the European Central Bank is set to hold its first meeting on Thursday.

Daily digest market movers: miss on estimates

  • The US has performed fresh strikes on Houthi rebel positions in Yemen.
  • The Bank of Japan (BoJ) has kept its interest rates unchanged. Governor Kazuo Ueda said that easing will still take place even when negative interest rates end. There was no commitment on the timing of when the actual hike would happen. Markets are starting to recover after first not reacting well on being left in the dark on the timing of the first rate hike. 
  • Holders of Belarusian EU bonds have sent a notice of default to Minsk, according to RBC.
  • Near 15:00 the Richmond Fed Manufacturing Index for January was released. Previous number was at -11 with -7 expected. The current number came in at -15 and sees the sector contract further.
  • Around 16:30 the US Treasury will allocate a 52-week bill. 
  • A 2-year Note will be placed in the markets by the US Treasury near 18:00. 
  • Equity markets are back in the green after having an initial bad reaction to the BoJ. European and US equities are starting to advance in the green.
  • The CME Group’s FedWatch Tool shows that markets are pricing in a 97.4% possibility for an unchanged rate decision, with a slim 2.6% chance of a cut.
  • The benchmark 10-year US Treasury Note jumps back up to  4.13% after its decline on Monday to sub 4.10% and is holding that position towards the US opening bell.

US Dollar Index Technical Analysis: Look for clear direction at the end of this week

The US Dollar Index (DXY) is not giving up that easily on its opportunity to possibly pop back up above the important resistance at the 200-day SImple Moving Average (SMA) near 103.48. Despite downside pressure with lower highs and lower lows, the DXY for now is not selling off as one would expect in these kinds of conditions. Expect the main rehearsal to come on Thursday with the ECB rate decision, ahead of the US Federal Reserve meeting next week. 

There are some economic data points that could still build a case for the DXY to get through those two moving averages again and run away. Look for 104.44 as the first resistance level on the upside, in the form of the 100-day SMA. If that gets scattered as well, nothing will hold the DXY from heading to either 105.88 or 107.20, the high of September.  

A bull trap looks to be underway, where US Dollar bulls were caught buying into the Greenback when it broke above both the 55-day and the 200-day SMA in last week's trading. Price action could decline substantially and force US Dollar bulls to sell their positions at a loss. This would see the DXY first drop to 102.60, at the ascending trend line from September. Once below it, the downturn is open towards 102.00.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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